KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Reconsideration of Tax and Fiscal Policies after COVID-19

The purpose of the study is to put forth tax and fiscal policies necessary to make worsened fiscal conditions after COVID-19 more constructive and sustainable. We first present the long-term fiscal baseline projections until 2060 and suggest four policy measures that could enhance the future fiscal space of Korea. Then, we analyze the possible positive impact of intangible investment other than R&D on improvements in total factor productivity (TFP), which could result in a natural increase in government revenues through economic growth. Finally, we also empirically evaluate the pros and cons of several types of fiscal rules and suggest rules for spending that could be one plausible alternative considering the current policy environment in Korea. The main findings and policy implications are summarized as follows.

In chapter 2, we present policy measures needed to achieve the long-term fiscal policy goal announced by the Korean government in September 2020, the government debt-to-GDP ratio of 81.1% in 2060. Before delving into specific measures to enhance fiscal space, we look at the baseline debt-to-GDP ratio for 2060, projected at 144.8%. Among three risk factors considered in this study, the failure of discretionary expenditure control was most detrimental to future fiscal conditions. If the discretionary expenditure ratio to GDP is kept at 14.7% until 2060, the debt-to-GDP ratio is expected to add 86.1%p compared to the 2060 baseline.

Even if these risk factors are not realized and remain as the assumption of the baseline outlook, the 2060 debt-to-GDP ratio far exceeds 81.1%, the government's long-term fiscal goal. The analysis finds that the government debt ratio in 2060 could be reduced to 87.6% by reforming local education financial grants, additional control of discretionary expenditures, raising effective tax rates of income and value-added taxes, and reducing tax expenditures.

Over the past two decades, the Korean economy has experienced low economic growth despite the persistent expansion in traditional inputs, capital, and labor. In this circumstance, TFP has come into the spotlight as a new engine to revitalize economic growth, which could enhance government revenues and fiscal sustainability.

In chapter 3, we investigate the determinants of TFP, focusing on the role of intangible assets on firms' productivity. Exploiting firm-level data from Kisvalue, we first estimate the TFP of sample firms by applying Olley-Pakes (1995) method and examine the determinants of TFP. Our findings show that other intangible assets such as patents and copyrights play a more decisive role in improving the productivity of firms rather than R&D investment. This tendency appears to have strengthened after the global financial crisis. Thus, our results indicate that Korean firms have not achieved effective allocation among their investments in intangible assets. In this sense, we suggest the Korean government seriously consider re-designing the institutional system to encourage firms to diversify their investment in intangible assets.

In chapter 4, several empirical analyses were conducted to understand the expected positive and negative effects of the controversial introduction of the fiscal rules to enhance fiscal soundness. An international panel analysis confirmed that introducing such rules could increase fiscal space mainly by reducing the intrinsic interest cost of the existing national debt. On the other hand, it also confirmed concerns that the pro-cyclicality of fiscal spending could increase if fiscal resources were insufficient, especially in developing countries, or if applied excessively multi-layered fiscal discipline. In addition, it was shown that the introduction of the spending rules regulating the total amount of fiscal spending significantly lowered the probability of occurrence of a systematic banking crisis.

In Korea, it is difficult to set realistically achievable national debt and fiscal balance ratios due to rapid changes in demographic and industrial structure. Given this reality, the government needs to prepare reasonable fiscal rules for the growth rate of government spending and the ratio of expenditure to GDP in order to reduce the excessive burden on the national economy due to fiscal uncertainty. Although the current level of the national debt is relatively low, it is desirable to manage its increasing rate by applying reasonable fiscal expenditure rules coupled with the appropriate fiscal balance rules when a rapid increase in national debt raises concern.

Summary

Policy Study KOR Income Mobility in Korea and Policy Implications

This study examines the limitations of income mobility indicators, which are mainly used in existing studies, and presents the results of applying the analysis method of Krebs et al.(2019) to Korean survey data. The temporary income shock on residual income, which is not explained by individual characteristics such as education, job career, age, and so on, increases income mobility, but has a small impact on social welfare. On the other hand, the faster the permanent income shock disappears, the faster the difference between the residual income of low- and high-income earners decreases, and the higher the income mobility and social welfare. Of course, the greater the variance of the initial permanent income variance, and the greater the magnitude of the permanent income impact afterwards, the higher the income mobility but the lower the social welfare. In addition, 80 percent of one-year short-term income mobility was analyzed due to temporary shocks, including measurement errors, so it seems desirable to analyze income mobility analysis at least over the span of three years.

Korea’s income mobility itself is analyzed to have increased further since around 2012, but social welfare has decreased. This implies that the analysis of income mobility indicators themselves should not be the sole purpose of analysis. In order to increase social welfare as well as increase income mobility, it seems necessary to reduce the persistence of permanent shocks and reduce the size of external economic shocks that result in changes in residual income.

Even if income mobility is slightly reduced after tax, personal income tax acting as a buffer that can alleviate the size of income shocks increases social welfare. In this regard, it seems necessary to impose more burden on high-income earners of health insurance premiums and national pension premiums. the government cash transfer, which is being provided for the purpose of protecting the vulnerable, rather significantly reduced income mobility and social welfare, which seems due to the sharp increase in the portion of government cash transfer given to the top 40 percent earners comparing to 2007-2008. It is necessary, through further review, to be more careful in setting the beneficiaries of policy measures so that government cash transfer can be concentrated on the vulnerable.

The new income mobility analysis method introduced in this study can be applied to the study for income tax reform through a more detailed analysis for each component of income tax. However, this will be possible only when the National Tax Service has wider access to detailed items on individual income tax return form. In addition, the portion of government cash transfer given to high-income earners is also deemed for further review using administrative data.

Summary

KDI FOCUS Improving Tax Expenditure: From the Perspective of an Integrated Fiscal System

□ Designed to support specific groups and fields, tax expenditures are rapidly expanding, independently from direct expenditures with identical policy goals. However, without an integrated monitoring process, the interconnection between the two can sometimes weaken the goals they both seek. As such, a database that covers all tax and direct expenditures should be built and used to comprehensively review the effectiveness of the programs.

- Policies supporting diverse groups and fields are expanding in the form of tax expenditures at a considerable scale, particularly in social welfare, industry, SME, and the agriculture and fisheries sectors.

- The EITC was expanded without being reviewed for its effectiveness, and the CTC was adopted in 2015.

- The EITC, a tax expenditure and the NBLS, a direct expenditure, are both designed to support the income and self-reliance of low-income households, but the interconnection between the two creates an income reversal wherein more work leads to less total income.

- A 100 won increase in earned income reduces benefits by 125 won in benefits, leading to a 25 won decrease in the total post-tax income.

- Accordingly, these expenditures may be ineffective in inducing work and self-reliance of low-income households, contrary to the intended policy goals.

- Respective tax programs that are fragmentarily evaluated and revised in line with their respective goals could distort the whole tax structure.

- The tax reform in 2013 was intended to improve tax equity, but failed to reflect a comprehensive perspective within the overall tax system. As a result, the proportion of exempt individuals soared to 48% and went against the basic direction of governmental efforts to counter the low birth rate.

- To properly evaluate tax expenditure programs, relevant information needs to be provided in a timely manner.

- A database on tax and direct expenditures that seek identical policy goals should be built and the information must be interconnected.

- A structure that comprehensively examines both tax and direct expenditures should be strengthened along with an effectiveness check on respective tax expenditures.

Summary

Policy Study KOR Analysis on Macroeconomic Effects of Tax System Change: A General Equilibrium Approach

This paper analyzes macroeconomic effects of tax system change based on a calibrated dynamic stochastic general equilibrium model. Based on the IMF’s Global Integrated Monetary and Fiscal (GIMF) basic model, the model includes a pension module and considers four countries to reflect the future trend in age-related government expenditure and the trade structure of the Korean economy. Key parameters were set based on the latest statistical data and previous research results.

We examine macroeconomic effects of three types of tax system change: the temporary tax reductions to boost the economy, the permanent tax increments to finance the expected age-related or pension expenditure, and realistic tax policy changes in recent years or in the near future of home and foreign countries.

These quantitative exercises give us the following policy implications. First, the tax cut policies for stimulating the economy are less effective than the fiscal spending expansions. Temporary tax reductions may be at best complementary to other government spending policies firming up the policy direction of government in exceptional circumstances such as the economic crisis. Second, we need to start discussions on the structural change of the tax system to finance the long-term age-related spending. The consumption taxes are the most efficient policy measures minimizing the reduction in aggregate output but there is a risk of sparking political opposition because the consumption taxes tends to be regressive and the private consumption will sharply shrink at the time of tax hike. Third, the domestic spillover effects of major countries' tax policies are relatively large due to the small open economy characteristic of Korean economy, so it is necessary to consider preemptive policy responses to mitigate or reinforce the domestic ripple effects.

Summary

KDI Policy Forum Impact of Corporate Tax Cuts on Corporate Investment

□ There has been growing public support for a tax hike as corporate investment remains stagnant despite the recent cut in the corporate tax rate. Accordingly, this study aims to closely examine the impact of the corporate tax rate on investment.

- Managerial decisions, including those on investment, are based on a diverse range of factors, encompassing not only the corporate tax rate but also financial conditions and investment uncertainties. As such, corporate characteristics must be controlled, when possible, before estimating the impact of corporate tax change on investment.

□ An empirical analysis found that Korea’s listed companies expand their investment significantly when the corporate tax rate is reduced.

- For the robustness of the analysis results, this study adopted various models and methodologies to analyze listed companies in 2002-2014 and found that a 1%p cut in the average effective corporate tax rate caused the investment rate to increase by 0.2%p.

- In particular, it can be assumed that such an increase in investment may have been higher if the managements‘ tunneling activities were curtailed.

·An analysis, using a structural model, revealed that in Korea, management sought private interests nine times more than their counterparts in the US, diminishing the effects of a tax cut by roughly 28% in the short run.

□ Therefore, the government must take a cautious approach when increasing the corporate tax rate, and also strengthen the internal and external monitoring and supervision of management to enable companies to make reasonable investment decisions.

Summary

Policy Study KOR The Impact of Tax-regime Change on Investment and Dividend Policies

This paper shows that while the Korean corporate tax rate is relatively low compared to other major economies, the ratio of corporate tax income to GDP is relatively high. In particular, as the dividend capacity of listed companies, i.e. profitability and cash-flow, deteriorates the corporate investment in Korea could shrink on the reduction in the dividend tax rate.

In addition, it is shown using a theoretical model that the reduction on the corporate tax rate affects the investment and dividend policy the most by allowing managers to take advantage of or Tunnelings from the corporate cash holdings. However, the dividend tax cut expands the dividend income but has a negative effect on the whole economy. On the other hand, the impact of the corporate tax cut increases under corporate governance that does not have managerial Tunnelings because healthy governance without managerial private incentives reduces the relationship between investment and cash equivalents, and dividends and cash equivalents. Thus, policy makers should focus on improving the fundamental business environment rather than short-term stimulus such as a temporary corporate income tax cut or dividend tax cut.

Finally, this paper investigates the impact of financial variables and corporate tax cuts on dividend and investment policies by using a reduced model. The empirical results show that corporate cash holdings, cash flow, sales growth and average effective tax rate influence corporate investment. Also, it is shown that the dividend payout ratio at the previous period, cash flow, and average effective tax rate affect the dividend payout ratio

Summary

Policy Study KOR Tax Revenue Forecasts with Possible Structural Changes

During the past three consecutive years, over-estimations in forecasts of tax revenue have led to revenue shortfalls. These developments have motivated this study, which examines the current practices in tax revenue forecasting and the existing literature, and conducts tests for the presence of possible structural changes in tax revenue and other relevant time series. We then comparatively evaluate the performance of each forecasting model to select the best- performing models by tax item, using these to make 5-year forecasts for the revenues of the national tax and other key tax items.

While differences in political characteristics and budget processes across countries does not allow for a direct comparison, We find that the forecast errors for Korea’s tax revenue over the past decade are not particularly serious in terms of bias or instability when compared to that of other countries. Nevertheless, it is evident that the average bias has been widening recently, while the tax revenue has been overestimated by nearly 5% during the past three years.

To avoid the systematic over-estimation of tax revenue, it is important to consider the slowdown of tax revenue growth. We check the validity of the log linear system and strongly reject the log linear system. There is a clear sign of structural change in the linear trend or nonlinear trend in national tax revenue series and related macro series. However it is uncertain what kind of nonlinear trend is appropriate for the purpose of forecasting because several nonlinear specifications give similar in-sampling fit but make quite different out-sample forecasts.

We incorporate the element of structural breaks or nonlinear trend in making our forecasts through employing dummy variables, cubic spline models, exponential smoothing models, piecewise regression models combined with structural change tests, as well as a combination of the forecasting models. Because of the characteristics of each tax item’s data and the differences in the associated tax systems, different models were found to perform better for each tax item. For example, piecewise regression and exponential smoothing are effective for national tax revenue forecasting but vector autoregressive model and error correction model with dummy variables are best-performing for corporate tax revenue forecasting.

Due to the high possibility of recent structural changes in the national tax and corporate tax, the effects of such changes must be examined more closely. As there are still uncertainties regarding the existence of recent structural changes and their effects, using exponential smoothing models which take account of such uncertainties or a combination of models may contribute to gains in predictive power.

Along with the aforementioned technical treatment of tax revenue forecasting models, we would like to point out the necessity for a review of when the forecasts are made during the budget process. In addition to the fact that the circumstances in both the domestic and international economy, within which taxation must take place, have become increasingly complex, there have been calls for more accurate revenue forecasts to secure fiscal soundness. These developments suggest that we must reconsider whether it is adequate to present the 1-year horizon forecast (for individual tax items) when the budget is proposed to the National Assembly, and the 5-year horizon forecast (for the national tax) for the National Fiscal Management Plans. Rather than keeping revenue forecasts a one-off affair prior to the drawing up of the budget bill and its deliberation, making it an ongoing effort throughout the budget process and linking it to the next year’s budget process will allow for better amendment of errors and overall improvements in structural predictive power.

Summary

Policy Study KOR Efficient Management of Tax Expenditures

The growth of the Korean economy is slowing of late, apparently weakening the tax base to a considerable degree. Now concerns are being raised over the tax expenditure system that has been managed rather loosely so far, increasingly highlighting the need to streamline its overall conditions. In the recognition of the need, this study evaluated overall conditions as to tax expenditures, including the review of current tax expenditure structure and relevant fiscal disciplines. It also pored over the basic direction of the work to streamline the system and specific alternatives that are being now under consideration for funding the government’s new national agendas, focusing on the tax expenditure relating to corporate and earned-income taxes.

To efficiently manage tax expenditures, the criteria to define the coverage of tax expenditures must be firmly established first. It is necessary to build and manage clear criteria as to the coverage so that the information on tax expenditures is continuous and consistent, while at the same time minimizing the adjustment of items that have nothing to do with newly added or suspended taxes (including the end of ‘sunset’). Secondly, it is necessary to strengthen fiscal disciplines related to tax expenditures. It can be interpreted to allow room for natural rise in tax expenditure, which is seen as too generous. Third, a system to evaluate tax expenditures need to be reinforced. Currently, the Restriction of Special Taxation Act understands the ex-post management of special cases of taxation as a type of authority, not a duty, but this should be redressed towards more responsibility in ex-post management by making performance evaluation a mandatory protocol in order to build a strict evaluation and reflux system on tax expenditures.

In the case of tax expenditure relating to corporate tax, it is mostly large enterprises that have been benefited from tax exemption or reduction, such as R&D tax credit and job creation and investment tax credits, but this must be remedied by strengthening the standards applied to large enterprises step by step. Meanwhile, applying the standards to SMEs must be made in a differentiated manner based on a composite consideration of financial conditions of the concerned company. Until now, when a company meets the requirements as a SME, various supporting policies turn into a strategy to increase operating profits and reduce taxes, posing an obstacle that restrains the company from growing larger.

In the case of tax expenditure relating to income tax, the scope of earned deduction of necessary expenses needs to be expanded, instead of moving towards tax credits that raise tax exemption limit and cause tax resistance. This is because given that taxation equity between workers and business income taxpayers is improving gradually, moving towards the reduction in the earned deduction of necessary expenses is the desired direction for a policy to pursue. Meanwhile, it is necessary to classify insurances for health, long-term care and employment as quasi-tax as suggested in the revised tax bill in 2013 and then to deduct the entire payment to them as to the National Pension. Lastly, as for items of tax expenditures, the tax expenditure for standard deduction which substitutes special deduction items needs to be managed as an explicit tax expenditure item. In addition, considering that tax deduction on the payment to the National Pension is added to items for tax expenditure, it would be appropriate to additionally include other tax deductions related to social insurances, such as health, long-term care and employment.

Summary

Other Research KOR Policy Issues and Goals in Real Estate and Housing Markets

The financial crisis triggered by the US subprime mortgage meltdown has led to the global financial turmoil, which again has led to the decline in the real economy. The impact that started from the advanced economies is now spreading across the emerging economies. The Korean economy of course is not immune from this impact, and without improvement in the external economic environment, it would be difficult for Korea to overcome this turmoil indepen-dently, even when the government takes whatever actions necessary. In addition, the possibility that the financial and real economy crisis in Korea could be exacerbated by the” bursting of bubble” in the real estate market, there is a growing argument that the real estate-triggered financial crisis would be accelerated. Therefore, the changes in the real estate market and its system improvement have come to the fore as the most significant and pending challenge.

It was in late 2007 when this study was first planned, a time before the outbreak of the global financial crisis. Hence, the real estate market and the global financial crisis were not the main focuses of this study, and it was initially intended to seek for an answer to the principle question. In other words, this study started out from the recognition that the real estate has different characteristics from other goods, its supply is limited, it creates various values in several economic and social sectors, and it is significantly influenced by historical, political and cultural environments. Then, this study confirmed that therefore, the real estate policy is a comprehensive policy that embraces several diverse areas so that it is necessary to extensively review those various issues addressed from the real estate finance and taxation, related regulations, supply system and many others. Being conscious of the problem that there have been not enough studies conducted regarding the real estate market with comprehensive viewpoints, this study attempted to seek for the direction for policy issues and goals in the real estate and housing markets from the most comprehensive perspective as possible. Moon Joong Tcha et al. (2004) in the preceding ‘Housing Market Analysis and Policy Agenda’ attempted a comprehensive analysis on the changes in residential conditions, outlook for a long-term housing demand, main variables in the housing market and their influential power, and government actions to secure citizens’ housing rights. This study expands the scope of preceding study to the whole real estate market and analyzes the correlation between the real estate market and macroeconomic variables and the national economy from a long-term perspective.

It is indeed true that for quite a long time the real estate-related policies have been presented only in response to changes in macro-economic conditions on a present situation basis and a full diagnosis of the real estate market itself has not been made sufficiently. In this regard, this study does its best to breakaway from the viewpoint of considering the real estate policy as a solution to macroeconomic problems. It is regarded that the real estate finance or taxation revisions for inflation stability is more likely to distort the real estate market than likely to be successful as areal estate policy. So, this study seeks for alter-natives with its focus on the real estate market policy. In this context, the research outcome from Seung Hwan Seo (1999) is consistent with the direction of this study. Seo (1999) conducted an empirical analysis to show that the impact of the market fundamentals on the change in real estate prices is increasing overtime. This points to the fact that in a short term the real estate market could experience a change affected by the asset selection behavior, but in a long term the market fundamentals are significant and as long as they remain as the main decision variables, there is room for reconsideration of making the real estate the subject of a special policy.

The real estate market is closely related to macro economy and the financial market, while the real estate finance is closely tied to the real estate taxation and regulations. This indicates that the real estate policy should start out from the accurate recognition of its relative relation with other areas. The contents of each chapter in this study seek for alternatives to the solutions of financial, taxation, regulation and supply market problems, while based on the real estate policy made with the extensive perspective.

This study consists of three parts: Part 1 on issues relating to the real estate market, macro economy and finance; Part 2 on taxation issues relating to the real estate market; and Part 3 on issues to improve the real estate-related regulations and to revitalize its supply.

The focus of Part 1 is not to discuss the expectation of a short-term fluctuation in the real estate policy or a price-stabilization policy but to see the position of the real estate sector comparing to other national economy sectors. In terms of the whole national economy, Part 1 questions the possibility of over-investment in the real estate sector compared to non-real estate sectors, and reviews the measures to improve the overinvestment problems. It confirms that for the past decade, among OECD countries, the long-term average growth rate of Korea’s house prices has been low. Hence, this section attempts to identify the changes in the determinants of the house price fluctuation in Korea from the 2000s. This is because of the possibility that it could be the price determinant itself that has changed, not the short-term price fluctuation.

Following the outline, Part 1 consists of three chapters (starting from Chapter 2).Chapter 2 analyzes the long-term effect of the real estate policy on the national economy through an economic growth model. In terms of the whole national economy, this chapter diagnoses the possibility of overinvestment in the real estate sector compared to non-real estate sectors and conducts a simulation analysis on the changes that the increasing property holding tax and the LTV (loan-to-value) regulation have made on the welfare level. Its focus is on which distortion effect would be stronger between the property holding tax and the income tax. Provided that both land and building are used for the production of industrial capitals and houses, these two capitals stand in a substitutive relation to each other in the accumulation process. Therefore, the distortion effect of the property holding tax on buildings reducing housing supply is offset by the positive effect of land and buildings released from the housing sector working to stimulate the accumulation of industrial capitals. So, in the economy where the income created from the industrial capitals is taxed and the rent andimputed rent created from housing are not taxed, an excessive number of residential houses tend to be provided, compared to industrial capitals. This result is also consistent with the main direction of the study of the real estate taxation in Part 2. For instance, if increased property tax to solve the excessive investment in the real estate sector could enhance the welfare of the national public, this is because it coincides with the general direction of the improvement in the real estate taxation, the so-called, ‘low transaction tax, high property holding tax.’

Chapter 3 attempts to conduct a time-series data analysis of the user’s cost of capital depending on the ratio of house price to rent multiples of nationwide and metropolitan areas and the housing ownership. Chapter 4outlines the current status of the housing financial market of Korea since the financial crisis, estimates the long-term demand for the housing finance of Korea, and then examines the improvement challenges for the system relating to the indirect investment in real estate.

The discussion in Part 2 starts out from a critical viewpoint that the real estate taxation so far has been actively used as a policy instrument to uphold the stability of real estate prices. It can be said that the real estate price is determined through a close link between the present value of the future trend of rental income and the expectation of rising real estate prices. The real estate speculation is more related to the latter factor. Therefore, an in-depth assessment is required to see whether the property holding tax or the transaction tax works as a useful instrument to control the rising real estate prices caused by the latter factor. The preceding studies show that the methods of raising interest rates, regulating the bank loans (or real estate financing) and credit restriction have gained more practical outcomes in curtailing real estate speculation than the taxation system. Not only that, the rising real estate prices can be said to have resulted from the steep rise in real estate demand and the shortage in real estate supply, simultaneously. In this regard, in order to stabilize the real estate prices, the measures to curb demand for real estates should be, of course, implemented together with the measures to expand the supply of real estates. The problem is that the revisions in the real estate taxation so far can be categorized into the measure for real estate demand, which in other words, that based on the past experience, the measure has not provided sustain-able achievements in a mid- and long-term perspective.

Part 2 emphasizes the necessity of seeking a policy as the real estate taxation itself, not as an instrument for real estate policy. Above all, Chapter 5 ponders over an adjustment mea-sure that integrates the taxations relating to the real estate transaction and its holding. Chapter 6 and 7 discuss in detail over the effects and improvement challenges of trans-action-related taxes and the property holding taxes. Though there is not much disputes over the direction of improvement in the transaction-related taxes, there are several ongoing controversies over the direction of improvement in the property holding taxes. Recognizing this, the study conducts two additional empirical analyses in Chapter 8and 9. The analysis in Chapter 8 pays attention to what impact does the property holding tax on houses have brought to the income distribution structure by income class. Through this analysis, the study examines whether the tax burden of the property holding tax is progressive or regressive considering the income level. Chapter 9 observes the effectiveness of policy to increase the property holding tax by empirically estimating the impact that the comprehensive real estate tax which was adopted to stabilize real estate prices has made on the cheonsei prices, and also by estimating the degree of tax burden transfer.

The discussion in Part 3 is mostly focused on the improvement in the real estate-related regulations. It discusses various measures to improve the regulations relating to housing supply, development gains recapture scheme, redevelopment and reconstruction, the use of farmland and forestland, and other relating to the supply and demand of real estate. Chapter10 uses a term ‘housing supply scheme’ to refer to the rules that regulate the procedure, criteria, price, schedule, and etc. relating to the distribution of new public housing units. It then reviews several specific contents of housing supply scheme and suggests improvement measures that could systematically tie each system. To put it another way, this study identifies the housing supply scheme as an instrument that distributes development gains from the production of new housing units among landowners, developers, constructors, and contractors, and comes up with a measure under which the distribution structure of the development gains for participants in housing supply could contribute to reach the goals of the long-term housing policy. Chapter 11 takes a different perspective to deal with the development gains recapture scheme and the problems caused in relation to the development of public goods and then seeks for improvement measures. It discusses over questions, such as’ Is it really necessary to recapture the development gains?’ and ‘If so, when and how is it appropriate to conduct this recapture scheme?’ Chapter 12 explains the trend of growing attention on reconstruction and redevelopment projects since the late 1990s, reviews the problems and improvement measures of related regulations, and then suggests a future direction for development through the analysis of impacts caused by those regulations. Chapter 13 introduces the government’s announcement of its policy to increase land supply by expanding the application of city-use land to 9.2% in a long term from the current 6.2%, and then examines whether this policy could accomplish its goals by revitalizing the development of farmland and forestland.

Summary

Policy Study KOR IT Advancement and Tax Base Broadening

With the start of the Participatory Government, tax revenue has remarkably increased. As the fiscal need grows for North- South economic cooperation, improvement of social welfare, and expansion of local financial support, etc., efforts have been made to meet the needs by introducing a new strengthened property tax, by strengthening tax administration, and broadening tax bases.

The fiscal need is expected to continue to rise in the future, and efforts to meet the growing needs by additionally raising taxes and introducing new tax items weaken international competitiveness and result in increased economic losses. Therefore, the future direction for tax policy should be designed to adjust tax rates downward and to supplement the shortage by reducing tax omission and evasion, so that strengthening competitiveness and fairness could be obtained at the same time.

With this perspective, this study deals with rapidly changing IT (information technology) and measures for tax base expansion with its aid. The increasing trend of tax revenues for the recent years is reviewed first, and then the study identifies the current status of tax omission and evasion. It also reviews the cases of recent development of information activities associated with tax collection until recently, and analyzes its tax revenue effects.

As a result of the Participatory Government’s effort to induce taxpayers to reveal and detect tax bases by permitting income deduction of consumption made by their credit cards in 1999, VAT (value added tax) revenue has been additionally increased, and its effect is statistically and significantly confirmed. Also, additional deduction of consumption made by cash, introduced in 2005, does not significantly bring about increase in VAT. Furthermore, it has been statistically and significantly confirmed whether VAT revenue trend shifts upward under the Participatory Government compared to previous governments.

Lastly, the study introduces the electronic identification technology currently under development, which could trace the distribution flow of products with the code and eventually make tax administration easier. When connecting such information to the computer system of National Tax Service, it is expected that an integrated taxation will be possible, and that the possibility of tax evasion will drop significantly. In particular, this technology could be very useful in the market for alcohol where tax evasion is commonly found.

Also, by adopting a system of receipt transaction between companies, tax evasion could be prevented, according to the study. Although the technology of electronic identification can be applied as an actual taxation model, there could be risks of disclosure of company’s distribution process or internal information. Therefore, it is important to first prepare a legal framework to avoid these risks.

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